Doing the Right Thing: The Effect of Rotation Policies on Managers' Reports about Measure Management
41 Pages Posted: 16 Aug 2016 Last revised: 24 May 2021
Date Written: May 21, 2021
Measure management, which involves managing performance measures by distorting reporting and operational decisions, is a common problem for firms. We examine whether rotation policies facilitate the extraction of information about the occurrence and severity of measure management from business unit managers. Consistent with economic predictions, we find that rotation policies enable firms to compensate business unit managers less for reported information about measure management in their business units. Next to this compensation effect, we also find that the prospect of being rotated causes business unit managers to report more information about measure management in their business unit. The reporting effect is consistent with our prediction rooted in behavioral economics that the prospect of rotation causes business unit managers to base their reporting decisions more on the welfare implications for the firm and less on the implications for their own welfare. Our findings suggest that rotation policies have significant information extraction benefits for firms, especially for unit-specific information that is challenging and costly to extract.
Keywords: rotation, reporting, information asymmetry, measure management, distortion, performance measurement systems
JEL Classification: D91, C92, M40, M41, M54
Suggested Citation: Suggested Citation